The English Court of Appeal has handed down its judgment in the case of Joanne Properties Limited v Moneything Capital Limited and another1, which concerned the use and effect of the words "subject to contract" during the course of a negotiated settlement.
The decision highlights the importance of using labels such as "subject to contract" when negotiating contracts or settlements, as a means of indicating whether or not the acceptance of an offer will cause a binding contract to be formed immediately upon its acceptance, or whether such offer/acceptance is subject to the parties then agreeing the specific terms of their bargain.
The Appellant ("Joanne") was the owner of a building in London (the "Property"). It borrowed money from the Respondents ("Moneything") secured by a legal charge over the Property. Upon falling into arrears, Moneything appointed LPA receivers in December 2018. In January 2019, the parties agreed to (and did) sell the Property.
Following the payment of the costs of sale and the capital advanced under the loan agreement, the parties agreed to "ring-fence" £140,000, representing "sums that may be determined to be payable to [either party] subject to the terms on which the claim is resolved" (the "Ring-Fenced Sum").
The parties then entered into negotiations (the "Negotiations") as regards how that amount should be shared between them, resulting in a dispute as to whether or not the parties had entered into a binding contract in relation to the Ring-Fenced Sum.
The Negotiations took place by way of correspondence between the parties' respective solicitors, the majority (but not all) of which were expressly stated as being "subject to contract".
The correspondence between the solicitors culminated in the solicitor for Moneything emailing the solicitor for Joanne, stating that his client would accept £75,000 from the Ring-Fenced Sum, with "the mechanics and terms to be agreed" – the email was stated as being "without prejudice and subject to contract".
The solicitor for Joanne replied (in an email also marked "without prejudice and subject to contract") with the word "agreed", and noted that he would liaise with counsel and "put a proposal to you to achieve the desired end"
In the meantime, Joanne changed solicitors and several weeks later Moneything's solicitor wrote to Joanne's (new) solicitor, in a letter marked "subject to contract", and stated:
"We trust that your instructions accord with our understanding that the claim has been settled on terms…".
The letter enclosed a draft consent order which contained a number of terms that had not previously been discussed or agreed between the parties, and explained that it was in Word format so that tracked changes could be made.
When Joanne's new solicitor failed to respond to that letter and a further letter, Moneything's solicitor wrote again and stated that unless the draft consent order was agreed within seven days, Moneything would apply to the court for an order in those terms. An application was duly issued by Moneything which prompted Joanne's solicitor to respond in terms that there had been no binding settlement because the negotiations had been conducted "subject to contract".
At first instance, the judge found in favour of Moneything and held that a binding contract had been concluded between the parties' respective solicitors. Joanne appealed to the Court of Appeal.
Court of Appeal's judgment
The Court of Appeal unanimously upheld the appeal and overturned the first instance judgment.
In reaching its decision, the Court of Appeal referred to and cited various authorities where the meaning and effect of the words "subject to contract" had been considered. In particular, Lord Lewison's judgment cited the Court of Appeal's prior decision in Sherbrooke v Dipple2, in which it was held that:
"…there is this overwhelming point: Everything in the opening letter was 'subject to contract'. All the subsequent negotiations were subject to that overriding initial condition".
Lewison LJ also noted that the Court of Appeal in Sherbrooke had approved the proposition which had been formulated previously in Tevanan v Norman Brett (Builders) Ltd3, in which was held that:
"parties could get rid of the qualification of 'subject to contract' only if they both expressly agreed that it should be expunged or if such an agreement was to be necessarily implied".
In the present dispute, having established that there was no express agreement to expunge the "subject to contract" qualification, the Court of Appeal considered whether such an agreement was necessarily implied. The Court held that the "answer is undoubtedly 'No'". Consequently, the Court of Appeal found that the first instance judge had "seriously undervalued the force of the 'subject to contract' label on the legal effect of the negotiations".
Although Moneything's counsel cited the fact that one of the prior offers (which purported to be a Part 36 offer) made during the Negotiations had not been made on a "subject to contract" basis, and submitted that it had the effect of recalibrating the status of the negotiations, the Court of Appeal rejected that argument. It held that:
"the fact remains that both the putative offer and the putative acceptance were each headed "subject to contract". If the "subject to contract umbrella" had been lowered, those two communications raised it again".
Consequently, the Court of Appeal held that the parties had not intended to reach a binding settlement, without taking further steps.
This judgment, whilst unsurprising, serves as a useful reminder about the importance of using appropriate labels such as "subject to contract" in communications. This is particularly important given the way in which (under English law) contracts can, save for a few exceptions, be agreed informally and without any specific formalities taking place.
Although this dispute arose in the context of negotiating a settlement, it is likely to be equally relevant from a transactional perspective where it is common for parties first to negotiate the principal terms of their agreement (for example, the price) in heads of terms or in correspondence, before turning their minds to the secondary terms (which may be no less important). By using the label "subject to contract" parties engaged in contractual negotiations can take a degree of comfort from the fact that nothing said or done in the course of those negotiations will be contractually binding, until that label is removed.
As a matter of best practice, it is therefore always advisable to mark all communications (or refer to all discussions) during any negotiation as being "subject to contract", until such time that the parties are ready to conclude their formal agreement, at which point the "subject to contract" label should be removed. Where the negotiation takes place in the context of settling a dispute, it may also be appropriate to add the label "without prejudice". Doing this not only informs the other party (or parties) how they should treat the communication, but it also may assist to inform a court or tribunal as regards the nature of the communication, in the event a dispute subsequently arises in relation to it.